Trading Psychology Terms

Analysis paralysis occurs when traders overanalyze data and become unable to make timely trading decisions.

Anchoring is a cognitive bias where traders fixate on an initial price or forecast and underreact to new market information.

Cognitive biases are mental shortcuts that can distort trading decisions, ranging from anchoring to loss aversion.

Confirmation bias is the tendency to seek information that supports an existing trade idea while ignoring evidence against it.

Discipline is consistently following your trading plan and rules regardless of emotions or market conditions. It means taking only valid setups, honoring stop losses, controlling position size, and not revenge trading - discipline separates profitable traders from gamblers.

The disposition effect is the bias of selling winners quickly while holding losers too long in hopes of recovery.

Fear is a powerful trading emotion that causes traders to exit winning positions prematurely, avoid valid setups, or panic-sell during normal pullbacks, undermining rational decision-making.

The gambler’s fallacy is the bias that past random outcomes influence future ones—tempting traders to fight trends simply because “it must turn soon.”

Greed is the intense desire for excessive profits that causes traders to hold winners too long, take oversized risks, or abandon disciplined risk management in pursuit of unrealistic gains.

Hindsight bias makes traders believe they “knew it all along,” warping performance reviews and encouraging reckless overconfidence.

Loss aversion is a psychological bias where the pain of losing money is felt 2-2.5 times more intensely than equivalent gains, causing traders to hold losing positions too long.

Overconfidence is a cognitive bias where traders have excessive belief in their abilities after winning streaks, leading to reckless risk-taking and abandoned risk management rules.

Patience is the discipline to wait for quality setups and manage trades without emotional exits, protecting expectancy and mental capital.

Recency bias makes traders overweight recent results, leading to constant system tweaks and emotional decision-making.

Revenge trading is the emotional urge to win back recent losses by breaking your plan, overtrading, or increasing size. It destroys discipline and often turns a manageable drawdown into a catastrophic loss.

Trading psychology encompasses the emotional and mental state dictating trader success, involving management of fear, greed, and discipline to execute strategies consistently.

The winner’s curse happens when traders overpay to participate—chasing crowded breakouts or absorbing excessive slippage, leading to poor returns.